Are Law Partners Employees?

There is a wide array of law firm structures in use today.  The limited liability company (LLC), the limited liability partnership (LLP), the professional services corporation (PS) and the general partnership, to name but a few.  Equity ownership in any of these structures often comes with the generic title “partner”.  There are times, however, when another label applies:  employee.  This article addresses the consequences of when the lines cross between employee and partner, and how that can affect the both lawyer and the law firm alike.

In most states, including Washington State, the term employee is not well-defined.  Chapter 49.46 RCW defines employee as “any individual employed by an employer”.  In determining who is an employee, the case law places strong emphasis on control and/or the right to control.  If the employer dictates or has the right to dictate how the worker performs his or her job, then the worker is most likely an “employee”, at least for purposes of the Washington Wage Act.  The line between employee and independent contractor is sometimes blurred, but in the end if the worker is directed by an employer, or if the employer has the right to control, the worker will likely be characterized as an employee.

But what about law partners?  They are not independent contractors, as “of counsel” or “contract lawyers” usually are.  And one can hardly imagine a worker less subject to control or the right to control than an equity owner of a law firm.  Can a law partner be an employee, and if so, what are the ramifications of that?

Given the essentially useless statutory definition of “employee”, we are forced to look for the various badges of employment to make a reliable characterization.  One such badge, as mentioned above, is control.  Let’s leave that one out for now.  Another is the manner of taxation.  Are income taxes withheld and reported annually on an IRS Form W-2?  This is certainly a badge of employment.  Are the lawyers parties to a contract entitled Employment Agreement wherein they refer to each other as “employee?”  In other words if one calls oneself a duck, does that make one a duck?  That is another badge.  Are the lawyers compensated by salaries and bonuses (traditional “wages”), as opposed to draws, dividends or guaranteed payments?  The existence of any one or more of these badges can induce, and have induced, judges to conclude that partners are employees, at least for certain purposes.

The primary legal consequence for such a determination relative to law partners is the potential application of the Washington Wage Act (RCW chapters 49.48 and 49.52) to monetary disputes.  When a partner leaves his or her firm, it is not uncommon that there are disagreements over money allegedly owed.  If the firm has treated the partner as an “employee” evidenced by one or more of the badges of employment, then the dispute can become one over nonpayment of wages as opposed to a mere accounting exercise.  There is overwhelming significance to this. The departing partner who brings a wage claim exposes the firm to liability not only for the unpaid compensation, but also for double damages and in certain cases personal liability of the remaining partners.  And equally significant, if the departing partner prevails he or she will recover attorney’s fees; if the firm prevails, it cannot.

How the compensation is labeled (e.g., “draw”) is not necessarily dispositive of the application of the Wage Act to the dispute.  The definition of “wage” is remedial and intentionally broad. In Durand v. HIMC Corp., 151 Wn. App. 818, 831 (2009), for example, the court held severance to be a wage because the term “compensation applies to more than work actually performed: it applies to any form of compensation that is a byproduct of the employment relationship.” See also Dice v. City of Montesano, 131 Wn. App. 675, 689 (2006) (severance a wage); Gaglidari v. Denny’s Restaurants, Inc., 117 Wn.2d 426, 449–50 (1991) (back pay a wage); Hanson v. City of Tacoma, 105 Wn.2d 864 (1986) (front and back pay a wage); Naches Valley Sch. Dist. No. JT3 v. Cruzen, 54 Wn. App. 388, 399 (1989) (sick leave cash-out a wage); Dautel v. Heritage Home Ctr., Inc., 89 Wn. App. 148, 151–53 (1997) (commissions a wage).

Another potentially significant consequence to a law firm of the characterization of a partner as an employee relates to the wrongful termination provisions of the Washington Law Against Discrimination (WLAD).  It is essentially settled law that for purposes of application of the WLAD and the federal employment discrimination acts (ADA, ADEA, etc.), only “employees” are covered.  Decisions hold almost uniformly that equity owners of law firms, in particular law partners, are not protected against wrongful termination due to discrimination.  Where, however, a sufficient number of badges of employment are present, it is certainly conceivable that a court could conclude that the partner is an employee and thus protected against discriminatory treatment.

The take away should be this.  There is very little benefit to a law firm’s taking steps which might characterize partners as employees.  There are other better ways to define partners’ duties, responsibilities and compensation, including carefully crafted operating agreements and shareholder’s agreements.  On the other hand, there are significant benefits to a disgruntled departing partner being a nominal “employee” of the firm.  Depending upon which side of the dispute one stands, making a partner into an employee will make a big difference.